Searchlight Capital Partners is aiming for a first close of its third flagship fund in the next month, which is expected to be larger than its $1.94 billion predecessor, according to a source familiar with the matter.
The source said the New York-based special situations investor will hold an initial close on a “substantial amount” for Searchlight Capital III, for which it is seeking $2.75 billion and targeting a final close in the middle of this year. Fund II held a final closing in December 2015.
The firm declined to comment.
Fund III will invest in mid-market companies in North America and Europe in six sectors: consumer discretionary, consumer staples, communication services, information technology, industrials and, on an opportunistic basis, the education sector, according to meeting documents from the Pennsylvania Public School Employees’ Retirement System.
Investment scenarios will include distressed debt purchases, post-reorganisation equity purchases and debt-for-equity swaps via a chapter 11 proceeding alongside leveraged buyouts, minority stake investments and other offerings.
Equity investments are expected to range from $100 million-$200 million, and Searchlight expects the vehicle will make around 15 investments, each with a hold period of about five years. It will target a 20-30 percent internal rate of return and a 2x-3x multiple on capital.
PSERS committed $150 million to Fund III, while the Texas Municipal Retirement System allocated $50 million to the vehicle. The former also committed $74 million to Fund II, which has returned a 28.6 percent net IRR and a 1.49x net MOC, as of 30 September.
Searchlight’s large first close runs against fundraising trends for distressed debt and special situations vehicles. The total raised for those funds plummeted from $66.6 billion in 2017 to $23.45 billion last year, according to PDI data.
Searchlight maintains offices in New York, London and Toronto. The firm closed on its first non-control investment fund, Searchlight Opportunities Fund, at $386 million in April 2018.